ECB keeps rate at 2.5% as energy inflation raises concerns

**The European Central Bank kept its key rate at 2.5%, despite inflation in the eurozone climbing to 3.8%. Energy is complicating the outlook, and Mark Wall from Deutsche Bank anticipates another increase in December.

• The ECB maintained the deposit facility at 2.5% after the 25 basis point increase in September.
• Overall inflation reached 3.8%, its highest level since September 2023, and energy inflation hit 18.8%.
• Mark Wall considers an additional increase to 2.75% in December likely and warns that Christine Lagarde's announced departure adds uncertainty.

🚨 ECB keeps rate at 2.5% despite inflation surge

Eurozone inflation reached 3.8% in September and energy inflation, 18.8%.

Deutsche Bank forecasts another increase in December, up to 2.75%. The ECB did not confirm this measure. pic.twitter.com/R5Ph2YVaRV

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ECB keeps rate at 2.5% as energy inflation raises concerns

The European Central Bank (ECB) decided to keep its key rate unchanged at 2.5%, in line with market expectations, even though eurozone inflation rose to a three-year high. The decision maintains the deposit facility at this level, which is the interest rate that the central bank uses as a benchmark to remunerate the funds that financial institutions keep deposited at the institution.

The Governing Council acknowledged that rising energy costs could push inflation higher while simultaneously weakening growth. It also noted that core inflation and wages remain broadly stable for now, while financing conditions have tightened since the last meeting and could weigh on both prices and economic activity.

Energy once again drives inflation

Overall inflation in the eurozone reached 3.8% in September, its highest level since September 2023. The energy component reached 18.8%, in a context of persistent turmoil in the Middle East that has made it more difficult to anticipate price trajectories and their effects on the economy.

The ECB's statement presents this movement as a double-edged risk: energy costs can fuel new inflationary pressures but can also weaken growth. The institution added that financing conditions have tightened since its last meeting; this change, according to the Governing Council, will likely exert pressure on both inflation and activity.

The energy surge follows the outbreak in February of the war between the United States and Israel against Iran. Since then, the ECB has raised rates in June and September, with increases of 25 basis points each time. The June increase was the first since 2023.

Thus, Thursday's pause does not eliminate the tension between controlling prices and avoiding a greater slowdown in growth. The bank made it clear that it is observing core inflation and wages differently, which it currently considers broadly stable, against the uncertainty generated by energy costs.

A pause that does not clear doubts about December

Mark Wall, Chief Economist for Europe at Deutsche Bank, stated that anticipating the ECB's monetary policy is becoming more complicated. In a note published on Thursday, he questioned whether the two increases already applied and the tightening of financial conditions since September would be enough to counteract the rising risk of energy inflation; his answer was probably not.

Wall separated two elements of the debate: the effect of decisions already made and the new momentum that energy prices could bring. His assessment is an interpretation of the landscape and not an announcement from the ECB, which maintained the rate unchanged in its statement and described the risks without committing to a future trajectory.

The Deutsche Bank economist expects an additional hike in December, which would bring the rate to 2.75%, as long as Christine Lagarde remains at the helm of the bank. According to his forecast, this measure would likely mark the end of the rate hike cycle, although it is not a decision already adopted by the Governing Council.

The difference between the current pause and that projection summarizes the uncertainty faced by monetary authorities: energy inflation could require further adjustment, but tighter financial conditions may also weigh on growth. The ECB pointed out both risks, without specifying in the statement which one will carry more weight in its next decision.

Lagarde's Announced Departure Adds Uncertainty

The meeting also coincided with the announcement that Christine Lagarde will leave the presidency of the ECB on February 7, 2027, almost nine months before her term is set to end on October 31 of that year. Wall mentioned the transition as another unknown for the bank's decision-making next year, when the debate over inflation, energy, and growth will continue to shape monetary policy expectations.

The economist stated that, in his view, the institution is more important than the person leading it, although he acknowledged that the announced departure introduces uncertainty. This assessment accompanies his forecast of a final hike in December while Lagarde remains in office, not a confirmation that the ECB has already set the course for that month.

The available information does not identify who will succeed Lagarde, so there is no basis to anticipate who will occupy the presidency. The announcement of her departure came on the same Thursday as the decision on rates, and Wall considered it a relevant factor for next year's monetary policy.

For now, the ECB's immediate message combines a stable rate of 2.5% with caution regarding the evolution of energy and financing. The inflation figure for September, at 3.8%, and Wall's forecast of a new increase in December keep the debate open, but the next decision will depend on the Governing Council's assessment of the described risks.